Answers
Applied Skills, TX – UK
Taxation – United Kingdom (TX – UK)
September/December 2019 Sample Answers
and Marking Scheme
Section C
31 (a)
(b)
Marks
Kagan’s revised income tax liability for 2018–19 will be £170,667 (165,600 + ((15,300 – 2,000) at
38·1%)).
(i)
(ii)
The base cost of the shares will be their value at the time of the aunt’s death (£510,000), so the minimal
increase in value is likely to be covered by Kagan’s annual exempt amount of £11,700.
£
400,000
0
0
0
9,600
1,950
––––––––
411,550
0
––––––––
411,550
––––––––
Income tax
£
134,500 at 20%
100,000 at 20%
115,500 at 40%
159,600 (411,550 – 1,950 – 100,000 – 150,000) at 45%
111,950 at 0%
––––––––
411,550
––––––––
Income tax liability
1
–––
Kagan – Income tax liability 2018–19
Employment income
Pension lump sum
Premium bond prizes
Interest from ISA
Property income
Dividend income
Personal allowance
Taxable income
(c)
1
–––
6,900
20,000
46,200
71,820
0
––––––––
144,920
––––––––
(1) The amount invested in the pension fund (and not withdrawn) will be outside of Kagan’s estate, reducing
the potential IHT liability.
(2) The investments in premium bonds, the ISA and the freehold property will not affect Kagan’s potential
IHT liability because one asset is simply being replaced with another of equivalent value.
25
½
½
½
½
½
½
½
½
½
½
½
½
–––
6
–––
½
1½
–––
2
–––
10
–––
Marks
32 (a)
Robinette – Taxable income 2018–19
Employment income
Salary (10,600 x 6)
Living accommodation – Rent paid (690 x 6)
Running costs
Workplace nursery
Mileage allowance (5,200 at 10p (45p – 35p))
Trading profit – Old business (working 1)
Trading profit – New business (working 2)
Property income (working 3)
Personal allowance
Taxable income
£
63,600
4,140
1,440
0
(520)
––––––––
68,660
75,350
11,800
––––––––
155,810
6,288
––––––––
162,098
(0)
––––––––
162,098
––––––––
½
1
½
½
1
W1
W2
W3
½
Tutorial notes:
(1) The provision of a workplace nursery is an exempt benefit regardless of the cost to the employer.
(2) No personal allowance is available because Robinette’s adjusted net income of £162,098 exceeds
£123,700.
Working 1 – Trading profit (old business)
14-month period ended 30 June 2018
Balancing allowance
(15,300 + 2,600 – 1,750 – 7,300)
Relief for overlap profits
£
106,900
(8,850)
––––––––
98,050
(22,700)
––––––––
75,350
––––––––
½
2½
½
Working 2 – Trading profit (new business)
Five-month period ended 30 June 2019
Capital allowances (26,200 x 100%)
£
55,700
(26,200)
–––––––
29,500
–––––––
Assessed in 2018–19
29,500 x 2/5 =
11,800
–––––––
½
1
1
Working 3 – Property income
Rent receivable (1,100 x 6)
Insurance (624 x 6/12)
Property income
(b)
(i)
(ii)
£
6,600
(312)
––––––
6,288
––––––
(1) If HMRC intend to carry out a compliance check into Robinette’s self-assessment tax return for
2018–19, then they will have to notify her by 14 August 2020 (12 months after they received her
tax return).
(2) If Robinette is confident that her return is complete and accurate, then the likely reason for HMRC
carrying out a compliance check is because the return has been selected on a random basis.
Robinette was in business during 2018–19, so all of her records (both business and non-business) must
be retained until five years after 31 January following the tax year, which is 31 January 2025.
26
1
1
–––
12
–––
1
1
–––
2
–––
1
–––
15
–––
Marks
33 Maison Ltd – Corporation tax computation for the year ended 31 March 2019
Operating profit
Non-deductible expenditure
Deduction for lease premium (working 1)
Capital allowances (working 2)
£
892,900*
22,340*
(715)
(70,500)
––––––––
844,025
28,685
1,460*
77,985
––––––––
952,155
––––––––
Trading profit
Property business income (working 3)
Loan interest receivable
Chargeable gains (working 4)
Taxable total profits
Corporation tax (952,155 at 19%)
W1
W2
W3
W4
180,909
––––––––
½
*Figures provided in question
1
Working 1 – Deduction for lease premium
Premium paid
Less: 44,000 x 2% x (12 – 1)
£
44,000
(9,680)
–––––––
34,320
–––––––
Amount assessed on the landlord as income
Deduction (34,320/12 years x 3/12)
715
–––––––
½
1
1
Working 2 – Capital allowances
£
£
Main pool
23,800
Annual investment allowance
Building costs
0
Ventilation system
6,700
Heating system
3,900
Furniture and furnishings
33,500
Refrigerator and microwave cooker
2,600
–––––––
46,700
–––––––
x 100%
46,700
–––––––
Total allowances
70,500
–––––––
½
½
½
½
½
½
½
Working 3 – Property business income
Rent receivable (18,300 + (18,300 x 2/3))
Security deposit
Insurance
Initial repairs
Advertising
£
30,500
0
(1,035)
0
(780)
–––––––
28,685
–––––––
Property business income
Tutorial notes:
(1) A security deposit, less the cost of making good any damage, is returned to the tenant on the cessation of a
letting. It is therefore initially not treated as income.
(2) The cost of insurance for the period 1 July to 1 November 2018 is deductible as pre-trading expenditure.
(3) The cost of the initial repairs to the warehouse are disallowable capital expenditure as the warehouse could
not be let out in its original state and this was reflected in the purchase price paid.
27
1
½
1
1
½
Marks
Working 4 – Chargeable gains
First property
Gain
Indexation allowance
Cost (101,000 x 0·315)
Enhancement expenditure
Chargeable gain
£
Second property
Gain
Indexation allowance
Cost (117,000 x 0·315) – Restricted
Chargeable gain
109,800
½
(31,815)
0
––––––––
77,985
––––––––
1
½
26,000
½
(26,000)
––––––––
0
––––––––
1
Tutorial notes:
(1) There is no indexation allowance for the first property’s enhancement expenditure of £26,200 because this
was incurred after December 2017.
(2) For the second property, the indexation allowance cannot create a capital loss.
28
–––
15
–––
Additional marking guide for section C
Marks available
31 Kagan
(a)
Retain
1
–––
(b)
(i)
1
–––
CGT
(ii) Income
Income tax
3·5
2·5
–––
6
–––
(c)
IHT
2
–––
10
–––
Total marks
32 Robinette
(a) Employment
Old business
New business
Property
PA
3·5
3·5
2·5
2
0·5
–––
12
–––
(b)
(i)
(ii)
Check
2
–––
Records
1
–––
15
–––
Total marks
33 Maison Ltd
C/tax
Other items
Premium
C/As
Property
Gains
0·5
1
2·5
3·5
4
3·5
–––
15
–––
Total marks
29
Marks awarded
TX-UK Examiner’s commentary on
September/December 2019 sample questions
This commentary has been written to accompany the published sample questions and answers and
is written based on the observations of markers. The aim is to provide constructive guidance for
future candidates and their tutors, giving insight into what the marking team is looking for, and
flagging pitfalls encountered by candidates who sat these questions.
Question 31
This question involved Kagan who had inherited quoted ordinary shares valued at £510,000. Kagan was
unsure whether to retain the shares or sell some of them in order to make four alternative investments.
Retain the inherited shares: Kagan would have received dividend income of £15,300 in addition to his
employment income of £400,000 (for which the income tax liability was given) for the tax year 2018-19.
Four alternative investments: These consisted of:
(1)
A personal pension contribution of £100,000, with Kagan having sufficient unused annual
allowances to cover the pension contribution. He would immediately have withdrawn £25,000 of
the pension fund tax-free.
(2)
Investing £50,000 in premium bonds.
(3)
Investing £20,000 in a cash individual savings account (ISA).
(4)
Purchasing a freehold property for £295,000, with the property then let out unfurnished.
After making the four investments, Kagan would have been left with £65,000 of inherited shares, on
which he would have received dividend income of £1,950 for the tax year 2018-19.
Part (a) for 1 mark required candidates to calculate Kagan’s revised income tax liability for the tax year
2018-19 if he retained the inherited shares. Although fairly well answered, many candidates used
valuable time doing full before and after tax computations. Kagan was clearly an additional rate
taxpayer, so all that was required was to calculate the additional rate tax due on the dividend income
and then add it to the provided figure of tax on the employment income.
Part (b)(i) for 1 mark required an explanation as to why little or no capital gains tax would have been
payable if Kagan had sold some of his inherited shares. This was because assets are inherited at the
value at the time of the deceased’s death. If these assets are sold soon after being inherited, there will
generally be a minimal increase in value (this fact was stated in the question), so any gain is likely to be
covered by the annual exempt amount. It was pleasing to see that this part was well answered by those
candidates who appreciated the tax treatment.
Part (b)(ii) for 6 marks required a calculation of Kagan’s revised income tax liability for the tax year 201819 if he sold some of his inherited shares and made the four alternative investments. This section was
reasonably well answered, but several points should be noted:
Examiner’s commentary – TX-UK sample questions September/December 2019
1
•
The question stated that a full tax computation was required, so exempt items (pension lump
sum, premium bond prizes and the interest from the ISA) should simply have been listed within
the main computation and indicated as such by the use of zero (0) – not by an explanation.
•
The non-availability of the personal allowance should have been indicated in the same manner.
There was no need to justify the non-availability given the level of Kagan’s income.
•
Although there might only be a ½ mark available for recognising an exemption, it is important
to know the various exemptions so that time is not spent producing unnecessary, and more
complicated workings – such as applying the savings income nil rate band where the interest
from the ISA was included as savings income.
Part (c) for 2 marks required candidates to state for each of the four alternative investments whether the
investment would reduce Kagan’s potential inheritance tax liability compared to him retaining the
inherited shares. Unfortunately, this section was not well answered. Candidates need to remember, that
unlike other taxes, there are few exemptions from inheritance tax. Therefore, the replacement of the
quoted shares with either premium bonds, an ISA or freehold property would not have changed the
value of Kagan’s chargeable estate. However, the investment in the pension fund (which is not
withdrawn) would have been outside of Kagan’s estate, thereby reducing his potential IHT liability.
Question 32
The income tax question involved Robinette.
•
She had ceased self-employment on 30 June 2018, preparing accounts for the 14-month period
from 1 May 2017 to 30 June 2018. The trading profit figure was given (before taking account of
capital allowances).
•
From 1 August 2018 to 31 January 2019, Robinette was employed by Bird plc, who provided her
with living accommodation and a place in the company’s workplace nursery for Robinette’s son.
Robinette used her private motor car for business purposes.
•
Robinette commenced self-employment again, in a new business, on 1 February 2019. She
prepared accounts for the five-month period from 1 February to 30 June 2019. The trading profit
figure was again given (before taking account of capital allowances).
•
In addition, Robinette received property income from letting out her main residence during the
period she was employed by Bird plc.
Part (a) for 12 marks required candidates to calculate Robinette’s taxable income for the tax year 201819. This section was generally very well answered.
However, candidates should always read the question carefully to ensure they understand what needs to
be done before starting their answers. Where only taxable income is required, as in this part, candidates
should never spend valuable time in also calculating the income tax liability. However, taxable income is
after deducting the personal allowance, and this should have been shown by the use of zero (0)
(Robinette’s level of income meant that the personal allowance was reduced to nil).
Given that the question involved various changes in Robinette’s sources of income, candidates needed
to be very careful in regard to time-apportionment and basis periods. Common problems included:
Examiner’s commentary – TX-UK sample questions September/December 2019
2
•
Time-apportioning profits for the period of cessation.
•
Not appreciating that WDAs, the AIA and FYAs are not given for the period of cessation.
•
Time-apportioning the trading profits on commencement before capital allowances have been
deducted.
With this type of question, candidates should think carefully about which workings can be included as
one-line calculations within the main computation, and which need their own separate working. For
example, the mileage allowance working of 5,200 at 10p (45p – 35p) = £520 should have been included
within the main computation.
Part (b) for 3 marks required candidates to (1) state the period during which HM Revenue and Customs
(HMRC) would have to notify Robinette if they intended to carry out a compliance check in respect of
her self-assessment tax return for the tax year 2018-19, and the likely reason why such a check would be
made, and (2) to advise Robinette as to how long she must retain the records used in preparing her
self-assessment tax return for the tax year 2018-19. Although there were a number of good answers, in
general this section was not so well answered as part (a). Candidates should note:
•
The fact that the requirement was for a total of just three marks should have been a good
indication that only a few brief points needed to be made, and not a much longer discussion.
•
Where a question asks for dates, then these dates need to be precise – including the year
relevant to the question.
•
Answers should always be related to the information provided. The question made it clear that
Robinette’s self-assessment tax return was complete and accurate, so the likely reason for HMRC
carrying out a compliance check was because her tax return was selected on a random basis.
Question 33
The corporation tax question involved Maison Ltd, for which a partly completed draft corporation tax
computation had been prepared for the year ended 31 March 2019. The figures provided were correct,
but there were four uncompleted sections, all related to property. These were:
•
A deduction for the payment of a lease premium.
•
Capital allowances in respect of the construction of an extension adjacent to the company’s
existing freehold office building.
•
Property business income from the letting of a warehouse which was purchased in a dilapidated
state.
•
Chargeable gains on the disposal of two investment properties.
The sole requirement for 15 marks was to prepare a completed version of Maison Ltd’s corporation tax
computation for the year ended 31 March 2019 after dealing with the uncompleted sections. The
question was generally very well answered.
Examiner’s commentary – TX-UK sample questions September/December 2019
3
As regards layout, candidates should again include as many workings as possible within the main
computation. Given that a draft layout was provided, then this layout should have been followed by
candidates in their answers, thereby allowing candidates to achieve as many of the available marks as
possible.
Lease premium: A number of candidates did not appreciate that this was a deduction rather than an
addition.
Capital allowances: Candidates often did not appreciate that the construction cost of the building itself
did not qualify as plant and machinery. The other costs (ventilation system, heating system, furniture and
furnishings, and a refrigerator and microwave cooker) all qualified for the 100% annual investment
allowance because the annual limit was not exceeded. It was therefore unnecessary to differentiate
between those items integral to the building, and those which were not.
Property business income: Many candidates were not aware that the cost of initial repairs was
disallowable capital expenditure because the property could not have been let out in its original state
and this was reflected in the purchase price paid.
Chargeable gains: Figures for the two chargeable gains were given, so candidates should not have
recalculated them. The reason for giving more information (proceeds and expenditure) was so that the
indexation allowance could be calculated. Candidates should always deal with each gain separately, and
not combine the figures. Common mistakes with the indexation allowance were giving indexation for
expenditure incurred after December 2017, and using the allowance to create a capital loss.
Examiner’s commentary – TX-UK sample questions September/December 2019
4